Negotiating updated rental rates a challenge

Farmers currently in the process of renegotiating rental agreements for 2013 are facing significant uncertainty regarding what the new year will bring.

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By Candace Krebs

LA Junta Tribune - La Junta, CO

By Candace Krebs

Posted Jan. 20, 2013 at 12:00 PM

By Candace Krebs

Posted Jan. 20, 2013 at 12:00 PM

COLBY, Kan. — Farmers currently in the process of renegotiating rental agreements for 2013 are facing significant uncertainty regarding what the new year will bring.

“Where will we be in the fall of 2013, that is the question,” said Dan O’Brien, Northwest Kansas area economist. He spoke recently on the topic of cash rental agreements during a Kansas State University ag profitability conference held in Goodland, Kan., one in a series being held around the state.

“The discussion is very timely. We’ve seen a lot of inflation in cash rents, and we’ve had lots of questions on the new rental tools that are out there,” he said. “We’re at a real decision point right now.”

Around the region, cash rents are climbing annually by double-digit percentages, following on the heels of higher land values and strong commodity prices. The competition for farm ground, whether to lease or purchase, is intense. Among other factors, more ag college graduates are seizing the opportunity to return home to farm, with many operations expanding to accommodate them.

“The barriers to entry are still tremendously high, but where you see younger people coming back in is in connection with established family farms,” O’Brien said. “Only 1 to one-half percent of farmland turns over every year, so it’s a very competitive situation. In the Western Corn Belt, in many regions, it’s very, very competitive to rent land as well.”

Nationwide, the average price of farmland has risen 31 percent in the past five years to $2,650 an acre, with sales in the Midwest topping $20,000 an acre to set new records.

In the past year, land values increased 10 percent nationally; 6.4 percent in Colorado; 19 percent in Kansas, 33.5 percent in Nebraska; and 11 percent in Oklahoma. In Iowa, the value increased by more than 15 percent for the third year in a row.

Cash rents have tagged along. According to the National Ag Statistics Service, the average cash rent for farmland in Kansas rose 19 percent on dryland and 13 percent on irrigated ground last year. In Colorado, rental inflation was lower on dryland property, at 8.7 percent, but roughly the same as Kansas on irrigated farmland.

“The real issue of stress right now is that farmers are caught over whether to base cash rents for this coming year on the grain prices we’ve been having or the ones we could end up having this fall,” O’Brien said.

That scenario is a familiar one.

“We are pretty similar to where we were last year at this time,” he continued. “Last year in May, based on projections of supply and demand estimates, we were projecting prices of $4 to $5 a bushel for corn. Of course, the drought happened after that.”

Page 2 of 2 - He throws out an adage farmers might want to keep in mind as they look ahead to what markets will do next. “The best cure for high prices is high prices,” he said.

In Northwest Oklahoma, area economist Rodney Jones observed that while rental rates are climbing, they haven’t kept pace with skyrocketing land values. “The rent-to-value ratio is dropping, and that bothers a lot of people,” he said.

Historically, the ratio of cash rent to land value has been in the range of 5 to 7 percent, a figure investors eye when setting goals for their return on investment. As that ratio has fallen closer to 3 to 4 percent, more competitive farmers have in some cases chosen to bid rents higher, with plans to capitalize on double-cropping or rotating higher value crop combinations to make up the difference, Jones said.

One potential danger right now, he said, is that the severity of the area’s drought will distort expectations farmers have for future crop prices.

“People do tend to get a localized mentality, thinking that surely commodity prices can’t do anything but go up,” he said. “What matters more is whether it will start raining in the Corn Belt. We know they are going to try to raise a massive amount of corn this year.”

In the short term, he said regional inflation on land or rent hasn’t been as pronounced as in the Midwest, and most farmers have strong enough revenue insurance coverage to manage through 2013.

But bigger challenges could lie ahead. Uncertainty looms on the horizon in the form of potential crop insurance cuts and other farm policy revisions, the fate of the national and worldwide economic recovery, continuing drought prospects and future changes in ethanol policy, to name a few.

“No doubt, the overall risk in agriculture is exponentially more than at any time in my lifetime,” Jones concluded.